My fear in investment

[ein55]

Thanks to James for bringing up this important topic which most people will avoid, esp during the downturn.

I just attended a wake tonight, paying last respect to a friend who has retired last year but passed away yesterday. This is part of natural life cycle: birth, aging, sick, death. Money/finance should not be the only fear when someone is retiring. Health and relationship (family/friends) are equally important. While doing our best to earn from investment, we should not let it affect our health. This is the reason short-term trading is more stressful comparing to longer term investor.

Here is my strategy if stock really goes in the wrong way unexpectedly for mega trend:

STI peak was 3313 in Nov 2010. Assuming one day there is a serious/major correction until mega trend is reversed, assuming we invested at STI = 3313 (we called 100% point). Assuming we are market cycle investor, holding to the stock till 200day MA is cut from top (by short term MA such as 2 day MA or 50 day MA), which may be equivalent to 20% correction. We sell and lose 20%.

Assuming the mega trend continues for another 1-2 years (or longer), till another sign of 200 day MA is cut from bottom by short term MA, this point could be 40% of the original value (valley of STI may be at 30% which we may know only after a few weeks later), then we buy.

Personally I think as long as we diversify the stocks (best diversification is close to index ETF), choosing fundamentally strong stocks (which can survive through the recession), the only risk is the holding time (for it to come back to original 100% point). By selling at 80% and buy at 40% point again, it helps to save 80-40 = 40% time of bull market which may be around 1 year (bull market may take 1 year to double 40% to 80% point and another 1 year to reach original 100% point again) and serve as an opportunity fund when stock market is low, as well as avoiding the risk company collapse during deeper recession. Even under the "normal" worst case, if we hold from 100% down to 30% and back to 100%, it will take much longer time, may be 5 years (eg from 2007 peak to possible higher peak in 2012), we will not lose the principal (just the interest in 5 years or depreciation due to inflation in 5 years). The only worry is another "Great Depression" which may take 10 years to recover and price may not go back to the same original peak, this is possible but probability is very low.

The only possibility one will lose money permanently is after selling in the previous cycle at high, but never buy back again at low in the next cycle (due to fear, avoid stock market forever). Unlike gold/silver which has much longer market cycle (20-30 years), stock market has proven itself again and again, market cycle is around every 3-5 years. Therefore, whenever there is a major reversal and investment is trapped, even if we sell it (eg at 80%), this is still just considered a paper loss because the price will recover back again and you prepare to buy back again. What comes down will go up.

So, if we can prepare to accept "paper loss" (even if we sell it) of 20%, prepare to wait for 4 years of winter (your holding power, don't need the money), prepare to buy back at lower point of next cycle (say 40% level), assuming our stocks are fundamentally strong (not those which will collapse during recession), our only risk is time itself (quoting the promotion statement from landbanking).

I think someone posted about histrical prices of world major indices yesterday, we can see 6-7% compounded annual growth of stock market. It implies if someone only has time (eg 40 years of investment life), the long time will smooth out all possible market cycles. Imagine if someone bought at the peaks of 70s and 80s or 90s and suffer major market cycle reveral, if the stock (provided fundamentally strong) is hold till today, will it be a loss?

Nowadays, I start to treat buying share as investing, not trading. If you buy a share, meaning you are shareholder, like owning a business of a company. We need to let the company have time to grow and earn money for us. We should not sell the company overnight because of 5% gain (close to trading). Of course, if one day the company's business is really poor (eg. close to 80%), it will be time we leave the company, but will rejoin when it picks up again (eg. 40%).

Now, back to the reality, main risks now are

1) Growing of middle east / north African crisis.
The scale may be as severe as the last Euro crisis in may 2010. Personally I think as long as the major oil producer country (eg. Saudi) is not affected, the correction will remain as correction, stock market may go flat at lower region or going down at very slow pace, but it won't change the mega trend, unless the oil supply is seriously disrupted

2) Inflation / interest rate control / property control...
Agan, these are good problems to have, usually happen during bull market to slow down its growth but intention of gov is not to reverse the mega trend. I believe the Asian gov will make adjustment if the economy is really cooled down too much.

3) Other unexpected collapse of a major system ... eg
- another financial/banking/property market system (quite unlikely as it was the main actor in last episode of market cycle, probably need to change another player),
- sudden major attack by terrorists (same scale and similar surprise as 911 atttack)
- serious shortage of any important commodity (oil, food, gold, etc), causing high price and bubble, then collapse again
- war / political unstability of major countries (between superpower)
We can't control these things to happen, we just need to accept the fact, exit from market, but always prepared to come back again.

In short, when mega trend is upward, ok to hold or buy more (if the upside potential is still high), as it will get higher. Similarly when mega trend is downward, ok to sell, it is not considered a loss, because you will likely to recover it within 4-5 years unless you never invest again.

Just my views .... filter with your own logical thinking process, accepting only if you also feel the same way.

[ein55]

I forgot to mention that if we buy at 100% (or 100 cents if it is easier to visualize), sell at 80 cent (when mega trend is down), down to 30 cent valley, then buy at 40 cent (when mega trend is up again) ... we won't need to wait till 100 cent (or 100%) again to breakeven. Instead, we only need to grow till 60 cent (or 60%) to recover the lost 20 cents (from 100 cent to 80 cent). If we wait till recovery till 100% or 100 cent, we will earn additional 40 cents (the price gain from 80 to 40 cents), which is not possible if we hold it for the entire market cycle.

So, the holding period is about max 4 years to breakeven (if we buy at peak but know to sell after 20% correction, prepare to buy again at much lower price), avg max 3 years for bear market + 1 year of bull market.

Meanwhile, let's take a rest if we don't prepare to buy anymore. Watch for the mid term trend (monthly), not daily/weekly trend, but will definitely sell if mega trend is down. On the other hand, if mega trend is still up for next few weeks, likely the lost 200 points of STI will be recovered.

Stock market is different from gambling. If we lose in gamling, the chances of winning in the next bet is the same as the last bet. If we "lose" in a market cycle, chance of winning in the next market cycle is very high because stock market is a cycle, if you are patient enough and your player (stocks) is strong enough, it can run through the marathon (let the player take a long rest during the mid of market cycle, waiting for the train to move up the hill again)

[newbie_mc]

Buying stock certainly beat inflation. However, we need to rebalance our portfolio by diversify having bond, fixed deposit for 6 month and other investment.. Buying stock is like how much we can afford to lose.. Trade discipline.. Dunno gamble by using margain to play. I agree market cycle is every 4 to 6 yrs..
Buying $200 per month in share is better than buying $200 into unit trust or insurance.. Insurance dont tell you how much they can earn you.. Buy low sell high is possible only when you buy when STI is low.. Those who are unware do not know how to beat inflation on their money.. So far singapore have 260000 trading account. More youngster start to trade using iphone as poems, kim eng, lim and tan, ocbc,uob kayhian having designed their apps..
Those who own stock you are not alone.. Doing homework in what stock giving dividend constantly also pay... Investing in stock is only a part of your portfolio to grow including CPF to beat 5% inflation.. I do hope everyone is well informed or educated on how to buyi stock as it is not gamble it should be on how to beat inflation.. Better than going to casino to gamble with uprisk higher.. There are always 2 side to see.. Postive and negative view on buying stock.. It depend on how you look at it in another angle..

[goldenpiggy]

Do your homework. Plan your trade. Be Courageous to do it. Follow through as plan. Control the emotion.